Ok, the Indian government can tell Blackberry to give up its keys for a particular encryption layer, but what is to stop people from using RSA 512-bit encryption with their e-mails? Wouldn't this force terrorists to pay attention to what encryption methods they are using?

Yes, because the only alternative to instantly obeying any desire of any government is suicide.

The desired outcome is that countries like India have a choice:

1) Fail to respect the rights and the privacy of your citizens
-- or --
2) Benefit from trading with first-world nations that are more prosperous and more technologically advanced

This is perfectly acceptable unless you are prepared to argue that a principled company should be forced to do business with foreign nations against its will.

Besides, India is not RIM's only market. No longer doing business in India would mean less profit. It would not mean no profit. It is not a "corporate suicide" scenario. It's more like a scenario of "which is more important to us: our integrity, or a few more points added to our stock price?"